6.3 Yields and Coupon Rates
The two “interest rates” that we associate with a bond are often confusing to students when they first begin to work with bonds. The coupon rate is the interest rate printed on the bond; we use it only to determine the coupon payments. The yield to maturity is an interest rate that we use to discount the bond’s future cash flow. We derived it from the marketplace, based on the riskiness of the cash flow. As we have seen when pricing bonds, the bond’s yield is the rate of return that the bondholder will receive at the current price if the investor holds the bond to maturity. The common name for this rate is yield to maturity.
The First Interest Rate: Yield to Maturity
As just noted, the market sets this discount rate, ...
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